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Every once in a while, a new-fangled macroeconomic theory becomes a fad in the economics discipline. The current flavor of the season is increasing industry concentration, prominently featured in the Kansas City Fed’s annual Jackson Hole meeting. Yet, don’t count on the Fed to rely on fashionable theories in the face of rising inflationary pressures.

Market sentiment had to adjust over the course of the first two-thirds of 2018 to economic surprises in several parts of the world, each tied to foreseeable changes in a region’s profit sources. In this excerpt from the September 2018 issue of The Levy Forecast®, David Levy discussed what to expect in late 2018 and 2019.

Chinese policymakers are once again faced with a familiar dilemma—absent significant stimulus and credit easing, the economy will probably weaken markedly, and financial problems will likely surge. Indeed, the only way China can deleverage its private sector while sustaining economic growth is to run large fiscal deficits.

Japan has been enduring deflation for so long that markets are almost ignoring the larger ramifications of an increasingly tight labor market and accelerating compensation. Looking down the road, as both the BoJ and the markets swing between the memories of the past two decades and a new reality of building domestic inflationary pressures, the yen carry trade will not only become less lucrative but also increasingly rocky.

In this chart-filled piece from back in May 2018, we laid out the case for shorting oil, writing, “While geopolitical uncertainty about supply from Iran, Venezuela, and elsewhere is a legitimate concern, it appears to have distracted attention from two fundamental factors: (1) U.S. production is resurging, and (2) global demand will probably be falling short of market expectations by year-end.”

Increased government deficit spending will increase imports, expanding the trade deficit, because anything that increases spending and incomes in the economy will result in some additional spending on imports. But, lo and behold, saving and investment balance out automatically—largely through changes in profits—not just in a theoretical closed economy but also in a real one conducting trade with the rest of the world.

There is little discussion of the real constraint on monetary policy: oversized global balance sheets and the consequent dependence of global stability on low interest rates. Sufficient increases in either short- or long-term interest rates would lead to financial instability, and 2018 is likely to bring more of each.